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TIME-VARYING COINTEGRATION

Published online by Cambridge University Press:  05 March 2010

Herman J. Bierens  and
Luis F. Martins
Herman J. Bierens*
Affiliation:
Pennsylvania State University
Luis F. Martins
Affiliation:
ISCTE Business School
*
*Address correspondence to Herman Bierens, Department of Economics and CAPCP, Pennsylvania State University, 608 Kern Graduate Building, University Park, PA 16802, USA; e-mail: [email protected].
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Abstract

In this paper we propose a time-varying vector error correction model in which the cointegrating relationship varies smoothly over time. The Johansen setup is a special case of our model. A likelihood ratio test for time-invariant cointegration is defined and its asymptotic chi-square distribution is derived. We apply our test to the purchasing power parity hypothesis of international prices and nominal exchange rates, and we find evidence of time-varying cointegration.

Type
ARTICLES
Information
Econometric Theory , Volume 26 , Issue 5 , October 2010 , pp. 1453 - 1490
Copyright
Copyright © Cambridge University Press 2010

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